Fasten your seatbelt: Airlines and cap-and-trade (CTC764)

Civil aviation is one of the fastest growing sources of greenhouse gas emissions, showing long term compound annual growth rates of emissions of 3-4%. A key policy objective will be to ensure airline emissions return to 2005 levels by 2050.

Airlines will join the European Union Emissions Trading System (EU ETS) on the 1^st January 2012 and are likely to be net buyers of carbon allowances in the EU ETS.

Unless the airline industry can achieve a significant breakthrough in energy efficiency or low carbon biofuels, additional policies to reduce emissions may follow, including further taxation to boost R&D spend and measures to limit new runway capacity.

The overall impact of the EU ETS on European airlines’ total profit pool is uncertain, although more price elastic and competitive routes such as short haul leisure may be the most exposed whilst less price elastic and competitive routes such as long haul business are less exposed and could even gain in profitability in the short term, due to the effect of free allocations.